Cash-out refis are out, cash-in refis are in for many homeowners
WASHINGTON — Thinking of cashing out some equity through a mortgage refinance? That's what millions of homeowners used to do when they needed extra money.
Now get ready for the post-boom, post-crash trend of "cash-in" refis.
"It almost sounds un-American," said Frank Nothaft, chief economist for mortgage giant Freddie Mac. "Almost nobody thought of putting money back in."
Cash-outs hit their highest level of popularity during the wild appreciation streaks in the early and middle years of the last decade. In mid 2006, just before home values began deflating across the country, the rate of cash-outs hit 88 percent, according to Freddie Mac, which monitors refinancings quarterly. It was the heyday of the pile-on-more-debt mind-set as nearly nine out of 10 refinancers whose loan files were sampled by Freddie Mac increased the size of their mortgage balance by at least 5 percent. When home equity holdings shrunk drastically and painfully in 2007 and 2009, it was time to pay.
Between 2005 and the third quarter of 2009, according to Federal Reserve estimates, American homeowners lost $7 trillion in equity — an unprecedented evaporation of household wealth. Almost nobody was spared. Now consumers seem to be more interested in reducing household debt, whether credit cards or mortgages. In Freddie Mac's latest quarterly survey of refinancings, 33 percent of homeowners put cash into the deal to lower their mortgage balances, the highest percentage ever to do so. Only 27 percent of refinancers took cash out, the lowest percentage on record.
Why throw money from savings into your mortgage? Nothaft says a small percentage of refinancers traditionally have preferred to lower their mortgage balances whenever possible. He is among them. There are at least two key rationales for doing so, Nothaft says. No. 1: If interest rates in the economy are low and you're getting minuscule returns on your bank savings or money market funds, paying down your home loan may provide you a better return on your investment.
For example, in early 2009, Nothaft and his wife chose to lower their mortgage balance at the same time they were refinancing to 4 3/4 percent. "We thought, 'Hey, this is a no-brainer. We can get a 4 3/4 percent return instead of close to zero' " on checking accounts and bank deposits.
A second reason to consider a cash-in refi would be to qualify for a better interest rate and terms on the replacement mortgage. Say you've got a loan-to-value (LTV) ratio above 80 percent and any refi of the current balance will require payment of private mortgage insurance premiums and possibly come with a higher rate.
But if you have some money that you could devote to lowering the principal balance (through cashing in), you might be able to cut your LTV to 75 percent or less and get a more favorable interest rate and avoid mortgage insurance premiums.
Cash-ins, in effect, are a disciplined form of saving that might be a heads-up financial management move.
Nothaft isn't sure whether the recent jump in cash-in refis is the start of a long-term shift, but there has been a steady rise since the fourth quarter of 2007, when cash-ins hit 9 percent, up from just 5 percent of all refis earlier that year.
By early 2009, cash-ins accounted for 13 percent of refinancings, then grew to 18 percent in the third quarter. After that, cash-ins jumped precipitously to 33 percent in the final three months of 2009. "It may well be a reaction to higher credit standards by lenders" — making cash-outs and refis tougher to get in general — or "some decision on the part of many people to be a little more conservative in uncertain times," Nothaft says.
A cash-in refi is hardly a remedy for everyone; most people just don't have spare cash available to throw into the pot. But with mortgage rates widely predicted to rise from 5 percent for a 30-year fixed rate at present to the mid to upper 5s as the year progresses, the numbers just might work for you.
Ken Harney can be reached at firstname.lastname@example.org.